A Guilt-Edged Guide to Martha's Future

March 04, 2004

So the worst has happened for Martha Stewart. After more than two years of angst and tabloid headlines, the domestic entrepreneur was found guilty on four counts of false statements, obstruction of justice, and conspiracy to commit perjury. BusinessWeek Associate Editor Diane Brady has been following the case. Where do Stewart and her company, Martha Stewart Living Omnimedia (MSO) go from here? Here, in question-and-answer form, are some answers.

Q: Will Martha go to jail?

A: With federal sentencing guidelines, it's likely that Stewart and former broker Peter Bacanovic, her co-defendant, will serve about a year in prison. Judge Miriam Cedarbaum could certainly deviate from those guidelines, but there's no compelling reason to do so in this case. Sentencing has been set for June.

Q: Are there any grounds for appeal?

A: Martha and her attorney, Robert Morvillo, think so, but it's unlikely that she would win an appeal in this jury verdict. The most tenuous charge in the case, securities fraud, was thrown out by the judge before it ever got to the jury. The rest of the case, and the evidence, was pretty clear cut.

That said, defense attorney Jack Sylvia, of Mintz Levin Cohen Ferris Glovsky & Popeo in Boston, thinks there may be grounds for appeal. "I certainly would argue that Stewart was denied the opportunity to demonstrate that the underlying activity was not unlawful," he says. Then again, Stewart could have taken the stand to defend herself on that issue. She, or her lawyers, chose not to do that.

Q: Was this a rush to judgment on the part of the jury?

A: Well, it was a rainy Friday afternoon before rush hour in lower Manhattan. But the jury of eight women and four men did seem to take the job very seriously. The questions they asked showed an understanding of the evidence, and they deliberated for almost three days on the charges, which isn't rushed at all for a jury case. Had they bought the Stewart defense that the entire case was ridiculous and shouldn't have seen the light of day, they probably would have come to a "not guilty" conclusion much earlier (see BW Online, 3/5/04, "At the End, Shock, Stoicism and Tears").

Q: What happens with her company now?

A: Given how the stock plummeted in the minutes after the verdict became public (after rising almost 20% just before the verdict was announced), it's clear that investors aren't brimming with optimism. Martha Stewart Living Omnimedia issued a post-verdict statement saying that execs there were "deeply saddened by the news" but determined to push on. In their view, the resources, talent, and reputation of the company are more than sufficient to continue MSO's development. My view: Come on! Not only has the brand lost a potent one-woman publicity machine, but its reputation will forever be linked to a convicted felon.

The most promising part of the empire will likely be the merchandising segment, which registered strong growth in the fourth quarter. People don't really care who makes their bed sheets or lawn furniture, as long as it has the right look at the right price.

The big problem is in the media segment, where advertisers have been running scared for some time. Big advertisers generally eschew any association with scandal, and the loss of Martha's personal touch with the magazine has already turned away some readers. For example, readers don't get the fun calendar any more, where Stewart would chronicle such activities as repairing deer fencing and preparing light lunches for 30 people. Nor will we be getting her smiling face between the pages, except in archived photos. The psychic heft behind the brand is seriously diminished. Now, we can all tune in to Queer Eye for the Straight Guy or Trading Spaces instead.

Here's a bittersweet irony: The Martha Stewart Living TV show was nominated for six Daytime Emmy awards on Mar. 3. But winning awards is not always synonymous with making money.

Q: Will Kmart (KMRT) continue to support her?

A: Her deal with the discount retailer extends for a few more years. There may be contract caveats that let Kmart withdraw if, say, Stewart goes to prison, although there is no evidence of that. The fact is, both sides continue to make a lot of money off the Martha Stewart Everyday line of products -- despite their recent niggling over royalties. If people keep buying, the two sides will likely continue their retail marriage.

Q: What is the impact of this case and the verdict overall?

A: In summing up the case, U.S. Attorney David Kelley said the verdict sends a message: "For anyone in Corporate America, beware! This type of conduct will not be tolerated." Certainly, we're not going to be hearing too many people citing verbal agreements with their brokers to sell stocks when they fall below a set price anytime soon, even at cocktail parties.

A lot of legal experts are troubled by this case, however. By plowing ahead with obstruction, conspiracy, lying, and even securities-fraud charges without accusing Stewart of a serious underlying crime, they feel the government has twisted a potent legal weapon. Multiple felony convictions with possible jail time should be reserved for significant breaches of the law -- and this case doesn't seem to qualify. In the annals of white-collar crime, and especially in this post-Enron era, the case may well go down as an overweening display of "Gotcha Justice" -- with the trophy being the head of America's most famous homemaker.